Otaviano Canuto, former State Secretary for International Affairs at the Brazilian Ministry of Finance, is Executive Director on the Board of the World Bank for Brazil, Colombia, the Dominican Republic, Ecuador, Haiti, Panama, the Philippines, Suriname, and Trinidad and Tobago. A former vice preside… read more

Protectionist Creeps

WASHINGTON, DC – Prospects for growth in global trade in 2016 and 2017 have been downgraded again. The World Trade Organization (WTO) now expects that trade this year will increase at its slowest pace since the post-2008 global recession. What is going on?

This is not purely a function of an anemic global economic recovery. After all, trade growth has typically outpaced GDP growth; in the years before the 2008 global financial crisis, the average increase was double that of output. But the ratio of trade growth to GDP growth has been falling since 2012, a trend that will culminate this year, with GDP growth outpacing trade growth for the first time in 15 years.

This reversal is driven partly by structural factors, including a plateau in the expansion of global value chains and a turning point in the process of structural transformation in China and other growth frontiers. The rising share of services in countries’ GDP likely implies further downward pressure on trade flows, given services’ lower trade propensity relative to manufactured goods.

But not all of the forces undermining trade are so long-term. Crisis-related, temporary, and potentially reversible factors have also had an impact. For example, the economic hardship faced since 2008 by many eurozone countries, which have traditionally accounted for a substantial share of global trade, has discouraged consumption, hiring, and much more. The weak recovery of fixed investment in advanced economies has also undermined trade, because investment goods involve more cross-border exchange than consumer goods do.

Perhaps most risky, however, is the growing political backlash against free trade, reflected in a lack of progress in recent rounds of trade liberalization and the implementation of protectionist non-tariff trade barriers. Though such creeping protectionism has not yet had a significant quantitative impact on trade, its emergence has become a major source of concern amid rising anti-globalization sentiment in the advanced economies.

Today’s trade bashing is what happens when economic concerns – including stagnating median incomes and, in some countries, high unemployment rates – turn political. Viewing economic dissatisfaction as an opportunity to win support some shrewd politicians, particularly in the advanced economies, have been pointing the finger at the nebulous, threatening forces of “globalization.” Immigration and trade, they claim, are the cause of citizens’ economic insecurity.

Exhibit A is the current presidential campaign in the United States, which has placed more emphasis on trade than any such campaign in the country’s recent history. In a difficult political environment, both Hillary Clinton and Donald Trump are proposing trade policies that depart from America’s long tradition of liberalization – with potentially dire economic implications.

Clinton, the Democratic candidate, now opposes the Trans-Pacific Partnership (TPP), a trade agreement that President Barack Obama’s administration negotiated with 11 other Pacific Rim countries and that is now awaiting ratification by the US Congress. She has also opposed conceding “market-economy status” to China, because it would make it harder to bring anti-dumping cases against the country. And she has advocated imposing countervailing duties on goods from countries that qualify as exchange-rate manipulators.

Trump, who has been among those leading the protectionist charge, takes these ideas much further. Like Clinton, he opposes the TPP and supports countervailing duties for currency manipulators. But he has also been particularly disparaging about Mexico and China, and is already calling for punitive US tariffs on both. Moreover, he promises to renegotiate and perhaps even abrogate existing trade agreements, alluding to the possibility of a US withdrawal from the WTO.

Clinton’s proposed measures would cause the US to lose out on some gains from trade, with consequences for the world economy. But the damage hardly compares to that which would be wrought by Trump’s proposals. After all, protectionist measures from the US would almost certainly spark reciprocal actions by its trade partners, potentially even spurring a trade war that compounds the economic pain for all.

As the Peterson Institute of International Economics highlighted last month, the negative impact would be felt most strongly by low-skill, low-income workers – precisely the people who are most convinced that less trade is a good thing. Worryingly, the report also shows that the US president has substantial leeway to adopt trade-curbing measures, without effective checks by Congress or the courts.

Obviously, there is a need to address the concerns that have fueled anti-globalization sentiment, politicians in the US and elsewhere should devise policies that will actually help their most vulnerable citizens. But demonizing trade is not the way to do it. On the contrary, as the experience in the 1930s showed, the easiest way to derail an already-feeble global economic recovery is to unleash a protectionist trade war.

The views expressed here are the author’s own and do not necessarily reflect those of the World Bank or any of the governments he represents.

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Comments

As I see it, the notion that "anti-globalization" is the root problem is ITSELF a prejudicial statement that reflects a particular political point of view -- and strategy.

Is hostility to "globalization" the fundamental problem, or is it the fact that the vast majority of the benefits of globalization seem to flow to 1% or less of the world's population?

Globalization ought to be a means to an end -- not be mistaken as an end in itself. And the correct end ought to be distributive justice on a global scale. I don't believe that that end can be achieved as long as 1% of the world's population controls 90% of the world's wealth.

And "free trade" is no proof against individual greed, corruption and the concentration of power in the hands of the few.

In many manifestations, your "protectionism" reflects nothing more than the desire for a fair deal -- for everyone. Read more

Canuto: Let's first trade environmental norms, social standards, financial norms and product safety standards. Then you ll see people’s opposition to trade vanish.

I am so glad that the CETA between the EU and Canada has failed just today !! And for a good reason: social and environmental norms were not binding, while corporation’s rights were constraining. We can all congratulate the Wallon parliament for stopping this unbalanced treaty and re-balance globalisation. Americans and Europeans are not against trade: They are against the rules of trade established by the powerful for the powerful. Read more

Has a man who has watched 2 jobs shipped 3rd world 5 dollar a day countries, and trained my own H1B replacement at a another, I don't really see myself as a creep. A man embittered by globalization for the rich and connected, and poverty for anyone who works possibly. But you know, I don't think calling people who don't like your "wonderful" for the rich globalization creeps is going to convince them of much. I must ask though, since I am a creep apparently for not liking being reduced to poverty for the corporate bottom line. Does this make you anything but an excuse maker for the rich and powerful? Read more

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